Resilinc predicts that if Chinese demand for US products materializes as projected, manufacturing companies in the US will begin to experience shortages, both of workers and raw materials. These shortages may jeopardize the ability of manufacturers to fulfill the increased demand.

Indeed, on the logistics side of the supply chain, labor shortfalls are already evident, as a lack of truck drivers leaves companies unable to meet current levels of demand for products made in the US—never mind those potentially inflated by China in the near future.

A Downward Unemployment Trend

Unemployment in April was 3.9%, the lowest it has been in 17 years. According to Trading Economics, unemployment in the US averaged 5.78% from 1948 to 2018, hitting a record high of 10.8% in November 1982 and an all-time low of 2.5% in 1953.

The reduction in unemployment resulted partially from a fall in labor force participation, which hit a three-month low of 62.8%. The Bureau of Labor Statistics expects the participation-rate reduction to continue, due to an aging US population. Therefore, the overall unemployment rate is likely to fall further, perhaps reaching 3.7% in 2019, according to FocusEconomics Consensus Forecast.

Commodity and Raw Material Prices on the Rise

While unemployment falls in the United States, the prices of many commodities and raw materials are escalating. Commodities like steel, aluminum, corrugated metals, diesel fuel, caustic soda, and their derivative products are becoming more expensive, driving manufacturing-cost increases in industries that depend heavily on these materials.

The April 2018 Manufacturing ISM Report on Business shows that the Price Index registered higher raw material prices for the 26th consecutive month. In addition, concerns exist about uncertainty surrounding current and potential US-China tariffs, which continue to be a possible price risk on the horizon. Many companies have put expansion plans on hold (or slowed them down) in light of these uncertainties.

Supply-side Concerns in the Spotlight

The ISM Manufacturing Report on Business also reveals that a slow-down in supplier deliveries created a backlog of orders. Current levels of demand are actually quite healthy, but most companies are unable to keep up due to supply-side issues.

Against this or any other backdrop, increased Chinese demand for US products can only be a positive development, yet the ability of US manufacturers to meet it is, at best, questionable right now. There is a real risk that the US manufacturing and export sector will miss a perfect opportunity to exploit Chinese demand—a demand that would help to counter record trade deficits and relieve the tariff-war scenario.

CEOs, Boards, Customers: They’re all Watching!

CEOs and boards do not like to leave demand unfulfilled for any reason, with mismanagement on the supply side being no exception. The expectation is that supply chain leaders predict market developments, plan for them, and ensure the supply chain adapts to support growth opportunities.

In short, supply-side bottlenecks are not on the executive agenda and your human resources are not well-spent chasing shortages and resolving allocations under the shadow of constraints.

Aside from that, if your company falls into the pattern of placing customers on allocation, pushing out deliveries, and failing to comply with perfect order expectations, your customers will soon seek out alternative suppliers. You will always have competitors ready to promise what you fail to deliver—and a promise is often enough to prompt defections by unhappy customers.

Meanwhile, premiums paid for freight and raw materials erode margins and further curtail long-term growth opportunities for your organization, so these too, are issues to address preemptively, rather than as a response.

Fortune Favors the Informed…

It may not be a Chinese proverb, but perhaps it should be, because the difference between leaders and laggards is that leaders plan and act pre-emptively. Those that evaluate market movements and trends will be planning for predicted outcomes now—and taking steps to ensure they can meet demand as it materializes.

Leaders invest in supply chain mapping and identifying suppliers and sites that have struggled to meet on-time delivery targets. They are also gathering capacity information and upside flexibility data from these sites.

Supplier and Site Capacity: A Good Place to Start

Resilinc’s Supplier Capacity Assessment tool can help you join the class of leaders that prepare their supply chains to dominate across a wide range of scenarios. We can help you quickly identify suppliers and sites operating at high capacity utilization rates and with less ability to add flex-capacity at short notice.

Armed with this vital information, your supply chain designers can spend their valuable time identifying and qualifying alternative, more readily capable sites and sources—so your enterprise won’t miss any opportunity to profit from increased levels of demand.

May 24, 2018 Posted by AdminMulti-tier Mapping 0 thoughts on “Why Brexit has the Automotive Industry in Tiers of Uncertainty”

Author: Simon Lucas

The Automotive Industry is in Tiers of Uncertainty over Brexit

While it’s unlikely that the United Kingdom will fully extricate itself from the EU for a few more years yet, concrete effects are likely to start biting sometime after the spring of 2019. For automobile manufacturers in the UK and elsewhere in Europe, “bite” may well be the operative word.

Amid the uncertainty about tariffs, border-crossing procedures, and other impacts on OEMs and suppliers, is there anything these enterprises can do to save themselves from “tiers” of uncertainty and begin to shape their post-Brexit future proactively?

Actually, as this brief article will reveal, there is—but first, let’s review the main sources of sleepless nights for procurement leaders in the automotive industry.

The Trouble with Tariffs

Even this close to the true commencement of Brexit in early 2019, it is still unclear what, if any deals will be made between the UK and Europe to facilitate trade. The worst scenario for auto manufacturers would be a “hard” exit, with World Trade Organization (WTO) rules being applied to the setting of tariffs. The outcome would likely be a 4.5% tariff on component parts moving across UK/European borders.

Given that the profit made by auto manufacturers is between five and ten percent, the application of WTO tariffs would significantly erode OEM margins. This would force manufacturers to consider options such as…

Passing costs on to their customers;

Making drastic changes to Tier 1 sourcing arrangements;

Relocating factories to minimize the import and export of components.

While a hard exit may be the worst-case scenario, the introduction of tariffs at any level will be bad news. With some auto components traveling between the UK and Europe as many as two or three times before ending up in a finished vehicle, even tariffs at half the value of those set by the WTO will have a telling impact on margins.

Bureaucracy at the Border

Brexit uncertainty for OEMs and component-suppliers is not limited to the matter of tariffs. EU membership offers freedom not only from import and export duties but also from complexities in the flow of goods and materials across European borders.

Within the European Union, customs formalities are minimal and delays are rare. These conditions are essential to the integrity of the “just-in-time” supply chain strategy, which the automotive industry has honed to perfection over decades of trade-freedom between EU member-states

For example, one Japanese manufacturer that builds cars in the UK and imports components from the EU is currently able to maintain just one day's worth of stock in its UK warehouses. Longer cross-border transit times would result in the need to maintain higher inventory levels.

Survivability of Sub-tier Suppliers

The issues mentioned above are a concern for manufacturers and Tier 1 suppliers alike, but their concerns do not end there. It is difficult to envisage which sub-tier suppliers will be affected and in what way.

Many sub-tier suppliers are SMEs that have never traded outside of the EU. Post-Brexit changes may place some of these enterprises in unrecoverable financial difficulty—a serious threat to OEMs in an industry where customers and suppliers form long-term, strategic, and interdependent partnerships.

Nevertheless, the lack of clarity as to how Brexit will play out is debilitating, leaving many suppliers unable to move beyond speculation as to their options. While a sense of helplessness is understandable though, any steps to prepare and plan for mitigation are better than none.

Supply Chain Mapping as a Proactive Measure

At this stage, a practical and achievable step-one for any company is to execute a detailed, top-to-bottom supply chain mapping exercise. There is really no time like the present to identify sub-tier suppliers and evaluate their exposure to risks from Brexit—and of course, their potential opportunities.

After all, while tariffs cannot yet be assessed in terms of hard numbers, the best and worst-case scenarios are predictable. With a full understanding of the current sourcing landscape, OEMs and suppliers can begin to model for these two scenarios at least and use the results to start planning "no-regret" measures, hedging strategies, and even big-bet moves in readiness for the Brexit sequence of events.

Fortunately, multi-tier supply chain mapping and impact-assessment is a very realistic proposition today, thanks to advanced tools like RiskShield, the latest resiliency solution built on the Resilinc platform.

Why Take Step One with RiskShield?

Soon enough, the separation of Great Britain and the European Union will begin in earnest, so now is a good time to prepare Brexit strategies. RiskShield can give OEMs and their suppliers a kick-start, via comprehensive supply chain mapping and 24/7 event monitoring.

Collaborative features enable suppliers and their customers to begin working together on scenario modeling and strategy formulation, and finally, a free 60-day trial and subscription pricing model make step-one achievable and affordable for any enterprise with interests in the automotive industry—and its own post-Brexit future.

About Simon Lucas

Simon Lucas is a supply chain management professional with some 20-year’s practical experience in domestic and global logistics. Perplexed by a lack of quality content online, Simon began writing for the industry in 2012. This became his second career, and very soon, his first. Simon now writes full-time, crafting content to help businesses boost their supply chain management and logistics capabilities.